Global Value Chains: Governance and Interventions

Opinion article by: Manuela Ramírez Cardenas (mramir67@eafit.edu.co)*
International Business and Political Sciences student at Universidad EAFIT, Colombia.

UNCTAD’s World Investment Report for 2013 highlights the importance of Global Value Chains as contributors for development, stating that they “have a direct economic impact on value added, jobs and income” (UNCTAD, 2013) as well as providing opportunities to build the productive capability of a country that would give it the chance for long term industrial upgrading. The WIR 2013 also highlights the risk in participating in GVC because countries, specially poorer developing countries, capture only a small share of the value created in the chain as they only participate on the low value added activities, like the supply of natural resources, and they risk remaining locked on those low value added activities without actually upgrading in the long term.

To avoid the risk of remaining on the lower part of the value chain it is important to implement policies that would enable GVC to actually work for development and the improvement of a country’s productive capability, however this is difficult due to the governance of the chain. According to John Humphrey & Hubert Schmitz governance “refers to the inter-firm relationships and institutional mechanisms through which nonmarket coordination of activities in the chain is achieved” (Humphrey & Schmitz, 2001), usually done by firms in developed countries, who are the ones that have the intangible competences– i.e. marketing, R&D, etc.- that are characterized by high barriers of entry and high economic returns that allow them to be located on a higher part of the value chain. Access to those intangible competences is tough due to those high barriers of entry that require investment, so developing countries usually remained locked in tangible activities which must follow the requirements set by the governors of the chain, that is, the developed countries’ firms.

The governors of the chain impose requirements that those on the lower part of the chain must meet in order to participate in it, and often developing countries are expected to comply with requirements that do not apply yet to their own domestic market, and this highlights the competitive challenges these countries face, with the possibility of an eventual exclusion in the participation of those markets, and makes it nearly impossible for those countries to implement actual policies that would eventually give them access to a higher value gain in the chain.

In my opinion, if GVC are to be successful tools for development, the governors of the GVC must implement value chain interventions focused on the support for development, not from an economic perspective but instead from a holistic viewpoint, by taking decisions that target the improvement of the quality of the lives of the different actors involved in the value chain and the reduction of poverty.

One of those value chain interventions that could have a positive impact in the reduction of poverty is related to the agricultural sector. There are studies that show that the growth generated by agriculture is more effective in reducing poverty that the growth generated in other sectors (Seville, Buxton, & Vorley, 2011), so it is paramount that developing countries that have a precarious agricultural sector, characterized by the poverty of the small-scale farmers, implement strategies to allow those small-scale farmers and producers to connect to value chains in formal markets to give them opportunities to actually overcome poverty, as it has been theorized that “linking smallholders with well-functioning local or global markets – ranging from local ‘street markets’ to formal global value chains – plays a critical part in long-term strategies to reduce rural poverty and hunger” (Seville, Buxton, & Vorley, 2011). However for countries like Colombia, the process of linking the small-scale farmers to global value chains is complicated, as the agricultural sector in the country has several structural challenges, ranging from lack of adequate infrastructure to lack of skills and training.

References: 

Humphrey, J., & Schmitz, H. (2001). Governance in Global Value Chains . Retrieved August 27, 2013, from Institute of development Studies: http://www.ids.ac.uk/files/dmfile/humphreyschmitz32.3.pdf 

Seville, D., Buxton, A., & Vorley, B. (2011). Under what conditions are value chains effective tools for pro-poor development?. Sustainable Food Lab & The International Institute for Environment and Development . International Institute for Environment and Development/Sustainable Food Lab . 

UNCTAD. (2013). World Investment Report 2013. UNCTAD. United Nations.

Global Value Chains (GVCs): the path towards a global economy

Opinion article by: Nathalia Rios Ballesteros* (nriosba@eafit.edu.co) 

Economics student at Universidad EAFIT, Colombia.

Global capitalism has taken over the current economic field. Over the last two decades, terms such as ‘globalization’, ‘internationalization’ and  ‘international free trade’ have emerged and have jointly given rise to a new line of research and a new ‘form of trade’ which has increased greatly in importance nowadays: Global Value Chains (GVCs).  According to Gereffi (2003) a value chain is the range of activities –understood as a set of process that take place transnationally - involved in the design, production and marketing of a product before it is turn into a final good; it is ‘the functional integration and co-ordination of internationally dispersed activities’’ (Gereffi 1999: 41)

Within this broad framework; the growing integration of the global economy posed by the implementation of the GVCs in the various sectors of the economy, has provided the opportunity for substantial economic and income growth, creating and promoting significant opportunities for developing countries and regions as a way to potentially increase the rate and scope of industrial growth and the upgrading of their manufacturing and service activities as well as a way for addressing the poverty and inequality inherent to its internal situation.

However, at the same time, GVCs carry along not only positive but also negative attributes for these countries. As it was stated by the UNCTAD WIR for 2013, even though developing countries are increasingly becoming active participants of GVCs and thus gaining significant improvements in living standards and domestic value added in their exports - higher contribution to countries’ GDP- through it, it still remains a long way towards equity in contrast with developed economies. In this sense, as global trade grows, developed economies appear to increase import dependence for exports, allowing developing countries to add disproportionately to their domestic value; in a nutshell, innovation activities tend to attract higher incomes and continue to be concentrated in the developed countries.

In this context, it seems like the impact of GVCs on inequality is perhaps a complex and wide reality, but unraveling this ‘complexity’ is the key challenge for all developing economies in order to succeed in their path towards integral growth and economic development. What matters then, is how producers – whether firms, regions or countries – become active participants of the global economy and GVCs to narrow this disparity. Hence, there is a need to manage and control the mode of insertion into this ‘plural economy’, to ensure that incomes are not reduced or further transferred to developed countries. Thus, identifying the circumstances which enable developing countries to extend and transform their production capabilities into innovation capabilities along with profit maximization, acquisition of competitive and comparative advantage, reduction of reliance on developed countries to create own-domestic value added and the diversification and expansion of the range of production, which implies exploring other economic sector and fields, rather than sticking into the one that provides the least profit range: the primary sector, can become useful strategies to forge the way to a true global economy.

References: 

Gereffi, G., 1999, ‘International trade and industrial upgrading in the apparel commodity chain’, Journal of International Economics, Vol 48, No 1, pp 37-70.